Since we removed shares in holidays operator Tui Travel from our sell list in late November, their price has soared 39 per cent. While there are some good reasons for the re-rating, and the company is clearly better placed than embattled rival Thomas Cook, we believe that, at 192p, Tui's share price ignores immediate challenges facing the industry as well as longer-term issues.
- Outperforming Thomas Cook
- Strong balance sheet
- Cash-strapped UK consumers
- High oil price
- Structural trend away from packages
- Unrest in north Africa
Tui still faces a challenging year, despite its strong balance sheet. The UK, which generates nearly a quarter of group revenues, has been weak since the second half of last year. With UK consumers facing a continuing squeeze on their spending, there is reason to be nervous about this year's key summer booking season. What's more, there have been signs of weakening demand in continental Europe, too, with France especially affected by the unrest in its popular North African destinations. Simultaneously, the oil price remains stubbornly high, which has significant cost implications for tour operators, even though hedging contracts will shield them this year.
| TUI TRAVEL (TT.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 192p | MARKET VALUE: | £227m | |
| TOUCH: | 192-193p | 12-MONTH HIGH/LOW: | 252p | 132p |
| DIVIDEND YIELD: | 6.3% | PE RATIO: | 24 | |
| NET ASSET VALUE: | 169p | NET CASH: | £4m | |
| Year to 30 Sep | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 13.9 | -267 | 20.4 | 9.7 |
| 2009 | 13.4 | -94 | -4.8 | 10.7 |
| 2010 | 13.5 | -73 | -11.1 | 11.0 |
| 2011 | 14.7 | 144 | 7.7 | 11.3 |
| 2012* | 14.6 | 194 | 8.1 | 12.1 |
| % change | -1 | +5 | +5 | +7 |
Normal market size: 15,000 Matched bargain trading Beta: 1.3 *Investec Securities forecasts | ||||
Since the credit crunch, bookings have tended to come later in the year, which is likely to add to investors' nervousness, as the price-cutting forced upon holiday operators late in the summer booking season has the potential to shred their profits. The next news expected from Tui will be its first-half results in May. And, while a bid from its parent, Tui AG, is a perennial hope, it did not materialise when the share price was much lower than it is.
Longer-term concerns for investors revolve around structural changes that are slowly occurring in the holiday industry. The internet makes it ever easier for consumers to put together their own packages, cherry-picking from low-cost airline flights and hotel deals. The travails of Cook may even serve to push more consumers in this direction rather than encourage them to book with a rival tour operator.
